The UAE bourses will grow by 43 per cent to go past the 9,000-mark by the end of this year despite the current volatility in world markets due to the sub-prime induced liquidity crisis, according to Kuwait-based investment bank Kuwait Financial Centre, or Markaz.
The bank predicts the Gulf stock markets may provide the necessary “lifeboat opportunity” to global and emerging market investors this year even as global financial markets continue to suffer. Propelled by increasing oil prices, the macro economic picture for the region has never been better, according to Markaz. “The copious flow of revenues since 2002 is triggering a major investment boom estimated at over $1.5 trillion. The oil wealth is resulting in continuous out-performance of GCC companies helped by strong demand,” Markaz said in the report.
According to the report, GCC stock markets will average a return of about 20 per cent for this year. “While this may seem modest given the return of 36 per cent last year, nevertheless there is more of an upside risk to this estimate than downside.”
The growth in expected earnings this year in the UAE is projected to be around 28 per cent, while the index is expected to grow to 9,007 points. The bank said its forecast model is built on earnings expectations (through bottoms-up company research) and valuation focus. Earnings in the GCC stock markets are expected to grow by about 30 per cent this year. Kuwait and Qatar are expected to grow by 42 per cent and 30 per cent respectively, while Bahrain is expected to witness the biggest index growth of 51 per cent followed by the UAE at 43 per cent.
Valuation will continue to be a concern this year, the bank said, as some markets such as Saudi’s Tadawul have experienced steep run up in recent months. However, the bank thinks they are not at the peak levels. Overall valuation (represented by price to earnings ratio or P/E) is expected to contract by a marginal one per cent this year. Bahrain is expected to provide the best upside though it is a small market in relative terms. “While UAE, Kuwait and Qatar provide good upside, Saudi Arabia may see a year of consolidation,” the report said.
The bank said it expects the heavyweights in the Saudi market to outperform other stocks. However, the view with regard to heavyweight stocks is not common across the GCC, according to the bank. The top five companies in Kuwait, for instance, are expected to provide a weighted return of 13 per cent as compared to the expected return from the Kuwait market at 30 per cent. Zain, the largest capitalized stock in Kuwait, may see strong earnings growth. But the stock may witness some P/E contraction thus providing subdued potential on the upside. As a result, stock selection is expected to be a challenge in 2008, according to the bank.
In the UAE, except for Mashreq that may experience some P/E contraction, other frontline stocks are posed to post good upside backed by strong earnings growth. In Qatar, Q-Tel is expected to provide significant gains. Although the stock provided a meagre 4 per cent return this year, the bank expects both earnings growth and PE expansion to provide the necessary trigger for an expected 59 per cent return this year, thereby providing the highest returns among the heavyweights in GCC.
The total volume traded in GCC markets last year increased by 68 per cent on a year-on-year basis to 246bn shares, the bank said. Among these, UAE and Kuwait posted the highest increase at 118 per cent and 87 per cent respectively. The UAE, which has two bourses (Abu Dhabi and Dubai), witnessed aggregate volume increase to 111bn shares as compared to 51bn shares in 2006. The aggregate value traded in the GCC markets, however, declined by 40 per cent last year to $962bn as compared to $1.60 trillion, led by Saudi Arabia, which saw a 52 per cent decline in the value traded on its bourses. That country’s markets constituted 87 per cent of the total value traded in the GCC last year.
As many as 38 new companies forayed into GCC stock markets last year compared to 26 in 2006. Of these, 68 per cent of the listings took place in Saudi Arabia. Saudi Arabia witnessed 26 new companies getting listed on its bourses last year, most of them being insurance companies. Kuwait and Bahrain lagged with only one company witnessing a listing. The UAE on the other hand, witnessed a decline in the number of new listings from 12 in 2005 to 10 in 2006 and only six new listings in 2007.
Oversubscription rates continued to decline on a GCC wide basis last year, with significant declines seen in the UAE and Saudi Arabia. In the UAE, average oversubscription rates, which climbed from 184x in 2005 to 222x in 2006, witnessed a remarkable decline to 57x for last year. However, that was still significantly high as compared to the rest of the GCC markets with Saudi Arabia being the next in line at an oversubscription rate of 5x for last year.
The UAE market also witnessed a reform in terms of pricing mechanism last year. “The average listing gains were more than Saudi Arabia in 2005 at 498 per cent. However, this has declined to 106 per cent in 2006 and 53 per cent as of last year.”
The GCC nominal GDP is expected to see an expansion of 14 per cent this year as compared to 11 per cent last year aided by a favourable business climate, sustained domestic consumption and rising oil prices. Both Non-oil GDP and Oil GDP are expected to grow at a similar pace of 14 per cent this year. Among the six GCC countries, Qatar is expected to post the highest growth in oil GDP this year, the bank said.
On the non-oil GDP front, the UAE is expected to post the highest growth of 21 per cent this year to $218bn. The UAE is also expected to grow at the fastest pace this year among all the other GCC countries, according to the bank. Non-oil nominal GDP growth has been averaging at 16 per cent for the period 2002-2006 and is expected to go up to 21 per cent this year, according to the bank’s data. “The country’s [UAE] nominal GDP is expected to increase by 16 per cent from $188bn to $218bn mainly on the back of growth in sectors like manufacturing, construction, financial services and tourism. Oil GDP growth is expected to be at just 6.3 per cent due to capacity constraints in oil output,” the report said.
UAE tops inflation rates in the GCC
Markaz predicts the UAE will witness the highest inflation rate in the region at the 10 per cent mark this year, even as the ministry of economy has forecast inflation in the country to be around 8 per cent for the year.
The rest of the GCC, other than the UAE and Qatar, will witness inflation rates at moderate levels this year, according to the bank. “Inflation started to witness a rise in the GCC region from 2005 onwards and is continuing to touch new peaks. For 2008, the UAE is expected to top the GCC countries with a year-on-year change in inflation at 10 per cent,” the Markaz report said.
“The inflation for 2006 was 9.3 per cent with the general CPI [consumer-price index] rising from 121.7 to 133.0. This was mainly due to rise in demand for low and medium-cost housing. This has slowly inched up to about 9.8 per cent for last year,” the report said. As per the Dubai Chamber, inflation for the period 2008-2012 is expected to average out at about 5 per cent.
Inflation rates in Qatar have hit historic highs, said the report. “The official data for first quarter of 2007 shows that the inflation rates breached the 15 per cent mark for the first time.” For the rest of the GCC, inflation is likely to moderate between 3 and 4.5 per cent.
The top five companies in the UAE bourses, which form 42 per cent of the market cap of the UAE, are expected to grow at an average rate of 22 per cent this year, according to Markaz.
The top five scrips in the UAE bourses – Emirates Telecommunications Corporation or etisalat, Emaar Properties, National Bank of Abu Dhabi, Mashreq and Dubai Islamic Bank – are expected to witness a price appreciation this year, with Mashreq as the only exception.
Emaar and Dubai Islamic are expected to be the most favoured stocks amongst the heavyweights, according to the bank. Bottoms-up earnings forecast for the UAE market is at 28 per cent for this year indicating that out of the 14 companies that form 70 per cent of the market cap of UAE, only two companies are expected to witness a decline in earnings this year. The Saudi Arabian markets are expected to see consolidation this year providing a modest upside. This is on the back of a robust 41 per cent return last year, which has pushed the P/E back to the hot zone, said to the bank.
On the Saudi index, Sabic is expected to see strong earnings growth and tops the list of prospects for the Saudi markets. Other blue chips in the Saudi markets may have normal to sub-par earnings growth and may experience some P/E contraction, according to the bank.
The outlook for the Kuwaiti bourse is expected to be positive with a return potential of 30 per cent, Markaz said. Among the five largest companies on the Kuwaiti bourse only two provide a positive upside. The top five companies in Qatar, which form 61 per cent of the total market capitalization, are expected to see robust earnings growth within a band of 30-40 per cent. Among the country’s heavyweights, Qatar Telecom and Qatar Islamic Bank provide strong upside in terms of price appreciation.
UAE bourses to pass 9,000 mark